USDA foresees record farm income

Despite projections for a $13 billion drop in the value of U.S. agricultural marketings for 2005, USDA's chief economist says record government payments will help push net cash farm income to a record high $78.1 billion, slightly ahead of 2004.

And Keith Collins said at Agricultural Outlook Forum 2005 at Arlington, Va., “Farm household income should remain close to last year's level, and still will be well above the average for U.S. households.”

With another sound income year in prospect, farmland values, are expected to rise 4.5 percent in 2005, Collins said, “and that will continue the improvement in the farm sector balance sheet we've seen in recent years.”

But current high land prices “don't present an alarming picture, assuming a continuation of current farm programs,” he said.

While “we have questions about the sustainability of the global economic recovery, issues about trade negotiations, emerging competitors, BSE (mad cow disease), and interest rates, despite all these risks, U.S. agriculture appears poised for a good year in 2005.”

Collins, who advises the secretary of Agriculture on programs, policy, regulations, and legislative proposals, said even though U.S. and foreign economies posted good recoveries in 2004, which drove up international spending on food by 4.5 percent, “about 2 percent more than what we saw a couple of years ago during the economic slowdown.

“The question is, will it persist in 2005 and beyond, and will it generate enough demand to make a positive difference in our farm markets?”

Another key issue, he said, is the strong foreign competition in export markets over the past decade and how that competition will continue to evolve.

Strong GDP

The U.S. gross domestic product (GDP) grew “a very strong 4.4 percent” last year, Collins said, and for 2005 is expected to be in the 3.5 percent to 4 percent range, which “I think will be supportive of domestic food demand.”

Foreign economic growth had “a nice recovery in 2004” — up by 3.7 percent, “a lot higher than the growth that was sustained over the previous five years.”

But for 2005, lagging performance in Europe and Japan, both now in recession, and slower growth in the former Soviet Union countries and in some developing economies, is expected to reduce foreign economic growth to about 3.1 percent.

An exception: China's economy is expected to outpace the world, growing by 8.1 percent.

“Historically, when we've seen the global economy grow by 3 percent or better over a sustained period, it has been very good for farm demand around the world, and that's the kind of period we're in right now.”

Industrial demand for farm products is also up, Collins noted; ethanol and biodiesel production are both soaring.

“Looking ahead to the 2005 crop, we expect 1.5 billion bushels of corn to be used for ethanol production — that's 14 percent of the prospective crop.”

The USDA forecast for farm exports for fiscal 2005, released during the Outlook Conference, is pegged at $59 billion, down $3 billion from last year, but up $3 billion from the estimate for the last quarter.

“This year's decline also reflects the lower value of major crops due to last year's record harvests and lower crop prices, and the forecast also assumes that markets that are now closed to our beef exports will remain closed.”

Ag trade surplus

Strong core economic growth and a lower value of the dollar should over time show up in higher U.S. agricultural exports and an improving trade balance, Collins said. In USDA's baseline economic projects to 2010, the agricultural trade surplus that's forecast to be down to only $1 billion this year is generally expected to rise to about $3.5 billion by the end of the decade.

Global markets for principal crops continue to adjust to last year's very large harvests, he said.

“Prior to last year, we had five consecutive years of grain demand exceeding production, and that led to progressively tighter stocks and higher prices. Inevitably, such a situation is followed by a rebound in production and lower prices, which is exactly what we saw in 2004. The large increases we saw last year look very similar to those we saw in 1996, which foretold several successive years of lower prices.

“Will history repeat itself? I think, unlike the mid-1990s, global grain stocks are not expected to be excessive compared to global grain use. In addition, economic growth appears much stronger now. So continued strong demand, coupled with some production problems, could quickly reverse the current price situation.”

A continuing concern, Collins said, is whether U.S. agriculture is losing its competitiveness.

“The U.S. share of world exports has been declining for decades for grains and soybeans, and only recently turned up for cotton as U.S. textile production moved overseas and created increased foreign demand for our cotton.

“Foreign countries' share of world grain and soybean exports rose from 2 percent in 1994 to 30 percent in 2004. But this threat has stabilized and this year is expected to be in the 20 percent range, about the same as last year.”

China as importer

China will be an increasing importer, Collins said, and while the former Soviet Union may expand its market share, particularly for wheat, a tough climate will make them an irregular competitor.

“While competition will be strong in world markets, we have every reason to believe the U.S. will remain a fierce competitor.”

Dale Moore, chief of staff for the secretary of Agriculture, noted that U.S. farm output today is about 260 percent over the 1948 levels.

“Along with the hard work and ingenuity of American farmers, science, and technological advances stand behind this soaring productivity and the success of U.S. agriculture,” he said.

“Where else but in agricultural research and development can the public get such a return on its investment?”

But while science has made farmers “extraordinarily efficient and our food supply among the world's safest and most abundant, farmers face new and daunting pressures that affect their bottom line,” Moore said.

“The interconnectedness of today's world markets and globalization offer sophisticated consumers high value, high quality products. It also increases our vulnerability: one nation's problem is now every nation's problem, as we've seen this year with BSE.”

Almost 1,500 people from the U.S. and several foreign countries attended this year's outlook conference.